Insider Trading Indictment Looms over Steve Cohen’s SAC Capital

Published

6 years ago

on

11/28/2012

A former employee of SAC Capital has been indicted on insider trading. On Nov. 20, U.S. Attorney Preet Bharara’s office charged former SAC Capital portfolio manager Mathew Martoma in a $276 million insider trading case, the largest of its kind.

The alleged nefarious trading took place in shares of biotech stocks Elan and Wyeth in July 2008 ahead of the release of key clinical trial data. The government alleges that Martoma was given inside information from a renowned University of Michigan neurologist who served as the chairman of the safety monitoring committee overseeing the clinical trial of an Alzheimer’s drug the two companies were developing.

The indictment is stunning not only because of the enormous dollar amount attached to the scheme, but also because it repeatedly refers to SAC Capital founder Steve Cohen. Although Cohen has not been charged, the evidence suggests that Cohen participated in trades that the government says illegally used insider information – though prosecutors have not said that Cohen himself knew the information was confidential.

According to the government, Cohen himself made substantial profits and avoided large losses in his own trading book as a result of illegal insider tips. What is not clear, however, is if Cohen was aware that the trader who provided the stock recommendations possessed inside information. He could have potentially traded on tips that were obtained illegally without actually being aware of it.

“Mr. Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government’s inquiry,” an SAC Capital spokesman said in a statement.

F.B.I. agents arrested Martoma, 38, on Nov. 20 at his home in Boca Raton, Fla., a nearly 8,000-square-foot Mediterranean-style mansion on the grounds of the elite Royal Palm Yacht and Country Club. He lives there with his wife Rosemary, a pediatrician, and three children. He was arraigned in Manhattan federal court on Nov. 26 and released on a $5 million bond secured by $2 million in cash or property.

Martoma is one of many traders who have earned millions of dollars working under Cohen and feeding him their best investment ideas. He joined SAC in 2006. In 2008, the year he participated in the alleged illegal trade, the firm paid Martoma a $9.3 million bonus. But SAC fired him in 2010 after two years of subpar performance.

Cohen, 56, is a legend on Wall Street, having amassed a multibillion-dollar fortune by posting phenomenal investment returns averaging about 30 percent over the last two decades. Starting with a $25 million grubstake, SAC now manages about $13 billion and has 900 employees across the globe. Cohen has also emerged as a major force in the art world, owning an eclectic collection that includes works by Picasso, Warhol and Cézanne.

“SAC’s extraordinary profits have always been something of a market mystery,” said Sebastian Mallaby, the author of More Money Than God, a book on the history of hedge funds. “As more and more lawsuits implicate former SAC traders, we may at last understand where SAC’s profits came from.”